On June 1, 2011, Citizens for Tax justice issued a preliminary report [PDF] showing that 12 major United States corporations had a cumulative effective tax rate of -1.5% on $171 billion in United States profits.  The preliminary report is a preview of a larger report that Citizens for Tax Justice is putting together and expects to release later this summer.  Citizens for Tax Justice previously released a similar comprehensive report [PDF] in the 1980’s, which according to Citizens for Tax Justice, played a key role in the enactment of the Tax Reform Act of 1986.  The purpose of this preliminary report was to highlight the need for corporate tax reform to close corporate loopholes that allow the large, profitable corporations to pay little or no income taxes.  However, corporate tax reform alone will not cause these corporations to pay the full statutory tax rate on their taxable income, taxing authorities must also engage in focused enforcement to bring up the effective tax rate of these corporations.

 

The preliminary report says there is a $62 billion discrepancy between the statutory tax rate of 35% and the amount actually paid by these 12 corporations.  Meanwhile, these same twelve companies are taking aggressive positions on their tax returns, which even they do not believe these positions will be sustained by taxing authorities on audit.  These corporations had over $30 billion in tax reserves (according to their most recent 10-Ks as of June 15, 2010 and listed in the Ferraro 500) set aside for to pay the additional tax liability should the tax positions that the corporations acknowledge do not meet a “more likely than not” standard be overturned on audit. 

While the $30 billion in tax reserves does not eliminate the $62.4 billion gap between the statutory rate and the amount actually paid, but it would bring the overall effective rate for these companies up to 16.3%.  Tax reserves reflect the amount that corporations acknowledge they likely owe in additional taxes should their aggressive positions be challenged during an audit.  In the past, these positions have often gone unchallenged because the IRS was unaware of which issues the corporation was uncertain.  However, the IRS has two tools that should help them conduct more focused audits; these tools are Schedule UTP and the IRS Whistleblower Program.  Schedule UTP will give the IRS a list of a corporation’s uncertain tax positions, ensuring that the IRS can question and look at these issues during an audit.  However, the IRS will still not know why the position is uncertain.

Through the IRS Whistleblower Program, insiders can come forward with information relating to improper positions that taxpayer took on their returns.  In the case of uncertain tax positions, corporate insiders are often familiar with these positions, and where the weakness in the positions lies.  These insiders are often privy to documentation and discussions and can present the full facts of the position in a clear and concise manner, highlighting which documents the IRS should focus their attention on.  In exchange for a whistleblower’s assistance in detecting tax underpayments, the whistleblower can receive a percentage of the underpayment collected based on the information they provided. 

Lynam Knott